Government Policy on Poverty

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Government Policies to Alleviate Poverty

Poverty is undesirable for governments as it leads to significantly reduced welfare and also has spillover effects (negative externalities) in terms of crime and health care.

Progressive taxation

Progressive taxes are designed so that the higher your income is, the higher the proportion of your income you pay in tax.
So the rich pay proportionately more tax than the poor.
This reduces the inequality in income and wealth.

Stimulate economic growth

Governments can generate economic growth using expansionary policies. This can be used to try to get people out of poverty.
This should also create jobs.
This should mean workers get higher wages and the government should collect higher tax revenue in return.
But this is difficult and inequality could worsen.

Minimum wages

A minimum wage could also be used to try to guarantee that workers receive a fair wage and can afford the basic needs.
- A minimum wage can also stop monopoly employers from paying workers too little and putting them in poverty.
Or a benefits system could be used.

Benefits

Governments pay benefits to those who are unable to support themselves due to being out of work, suffering from long-term illness or for several other reasons.
Benefits are an example of transfer payments and are funded through taxes.
Benefits are designed to prevent people from living in absolute poverty by meeting the cost of needs. By providing enough to ensure food, shelter and other essentials and for those who are temporarily unemployed it means they are fit enough to return to work.

State provision

State provision means that those goods and services which are deemed essential by the government are available for all regardless of income or wealth.
By providing schooling, children are given a more equal start in life regardless of their family background.
Without adequate schooling, the children themselves are limited in what jobs they can do when they are older which may keep them in poverty. They would also bring fewer skills to the workforce making the country less productive.

Economic Consequences of Government Policies to Help Poverty

There are a number of positive and negative consequences to government policies for tackling poverty:

Effects of progressive taxation

Progressive taxation can have unintended consequences.
By increasing the tax on higher income brackets, you are discouraging workers from earning more money.
The gain from working might not be as great as the loss of benefits from moving up an income bracket.
So progressive taxation can reinforce the poverty trap.

Effects of economic growth

Economic growth is not a simple way to alleviate poverty effectively. It must be carefully managed.
It can also impact the environment by using up scarce resources.

Effects of a minimum wage

In a perfectly competitive labour market, the introduction of a minimum wage can increase the levels of unemployment.
A national minimum wage underestimates the cost of living differentials across a country.
So a national minimum wage could be better for people who live in cheaper areas than for people who live in more affluent areas.
But the presence of a minimum wage could incentivise work.

Effects of the benefits system

The benefits system can disincentivize work.
This is bad for productivity and the economy.
Benefits that are means tested can also lead to a worsening of the poverty trap.
- If people think that their benefits will go down if their income increases, they may intentionally not go up an income bracket.